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Total investor-supplied capital and operating income

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Reference no: EM131912108

1. Companies HD and LD have the same total assets, total investor-supplied capital, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also, both companies' returns on investors' capital (ROIC) exceed their after-tax costs of debt, rd(1 – T). Which of the following statements is CORRECT?

a. Given that ROIC > rd(1 – T), LD's stock price must exceed that of HD.

b. HD should have a higher times interest earned (TIE) ratio than LD.

c. Given that ROIC > rd(1 – T), HD's stock price must exceed that of LD.

d. HD should have a higher return on assets (ROA) than LD.

e. HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's.

Reference no: EM131912108

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